Canadian pension plans saw their investment returns soar by 14.2 per cent in 2013, creating one of the key pillars for a remarkable turnaround in pension plan health last year.
A review of 120 defined benefit pension plans by pension services firm RBC Investor & Treasury Services shows the average plan earned returns of 6.1 per cent in the final quarter of 2013 and 14.2 per cent for the full year, due largely to large equity returns from soaring global stock markets. Pension plans earned an average of 9.4 per cent on investments a year earlier in 2012.
The higher market returns were one of the key factors in a remarkable turnaround in pension plan health last year. Higher long-term interest rates also reduced the size of the funding commitment facing pension plans, because their liability is calculated using long-term bond yields, and many plans also benefited from special cash contributions by companies to fund shortfalls.
"Pensions gained a lot of traction in 2013," said Scott MacDonald, managing director of pensions for RBC Investor & Treasury Services. "Strong equity gains and a weaker Canadian dollar led to an increase in assets, while higher long term bond yields reduced most plan liabilities, which will please sponsors."
Pension consulting firm Aon Hewitt said earlier this month that its database of pension plan clients shows the average plan 93.4 per cent funded at the end of 2013, up from just 68 per cent a year earlier, which means most plans have largely eliminated their funding deficits in a single year.
According to RBC Investor, foreign equities were the top performing asset class for pension funds, earning them 35.8 per cent returns last year, with the biggest single benefit coming from roaring U.S. markets. RBC said about 20 per cent of the foreign equity increase came from currency gains as the loonie fell during the year.
Pension plans also outperformed the markets with their Canadian equity holdings, earning 19.4 per cent on Canadian equities last year despite facing a large drop in the value of mining sector stocks. The S&P/TSX composite index posted a total return of 13 per cent gain last year.
"2013 was a really good year for active Canadian equity management," Mr. MacDonald said.
The bad news for pension plans came from their returns on fixed income investments such as bonds, losing 1.3 per cent last year on their holdings overall and facing particularly large losses on inflation-sensitive long-term bonds, which fell 13.1 per cent for the year.